The Federal Reserve is signaling a major pivot in how it views home loans on bank balance sheets. Vice Chair for Supervision Michelle W. Bowman says it is time to overhaul strict capital rules that have pushed lenders out of the housing market. Her proposal aims to restore profitability and strengthen the vital relationship between local banks and homeowners.
Nonbanks take over the housing market share
The landscape of American home lending has shifted dramatically over the last two decades. Traditional banks used to be the primary destination for families looking to buy a home. That is no longer the case.
Nonbank lenders and fintech companies now dominate the space. These companies operate differently than traditional depository institutions.
Michelle Bowman highlighted these startling statistics during her address in Orlando:
- 2008: Banks originated 60 percent of mortgages.
- 2023: Banks originated only 35 percent of mortgages.
- Servicing Drop: Banks held servicing rights on 95 percent of balances in 2008 but hold just 45 percent today.
This massive migration of business away from banks is not an accident. It is largely the result of post-crisis regulations.
Bowman argues that the current regulatory framework penalizes banks for holding mortgage assets. “This out-migration of origination and servicing has been costly for banks, consumers, and the overall mortgage system,” she noted.
Regulators tightened the screws after the 2008 financial crisis to prevent another collapse. However, the pendulum may have swung too far. The result is a system where banks find it too expensive to compete with nonbank rivals.
Capital rules need a fresh look for lenders
The core of the problem lies in “capital requirements.” These are the funds regulators require banks to hold in reserve to cover potential losses.
When a bank holds a mortgage or the right to service that mortgage, it must set aside capital. If the requirement is too high, the business becomes unprofitable.
Bowman is calling for a reassessment of how Mortgage Servicing Rights (MSRs) are treated. She suggests that the current risk weights do not reflect reality.
She proposed specific technical changes to the regulatory framework. These changes would lower the barrier for entry for community and regional banks.
Potential regulatory adjustments include:
- Eliminating the deduction of mortgage servicing rights from regulatory capital.
- Reassessing the risk weights applied to residential mortgage exposures.
- Tying capital requirements more closely to loan-to-value ratios.
These tweaks would effectively free up capital. Banks could then use those funds to issue more loans to consumers. It would level the playing field against nonbank lenders who face different regulatory standards.
Why mortgages matter for customer relationships
This issue goes far beyond simple balance sheet mathematics. For community banks, a mortgage is often the anchor of a client relationship.
When a customer gets a home loan from a bank, they often bring other business. They open checking accounts. They get credit cards. They might open savings accounts for their children.
Bowman described this dynamic as “a virtuous circle.”
Losing the mortgage business means losing that initial point of contact. Without the mortgage, a bank struggles to cross-sell other financial products. This weakens the bank’s long-term stability and profitability.
The Stability Factor: Banks vs. Nonbanks
| Feature | Traditional Banks | Nonbank Lenders |
|---|---|---|
| Regulation | Highly Regulated | Less Regulated |
| Funding | Stable Deposits | Volatile Market Funding |
| Service Model | Relationship Focused | Transaction Focused |
| Crisis Response | High Forbearance Rates | Lower Forbearance Rates |
There is also a strong consumer protection angle to Bowman’s argument. Banks tend to be more resilient during times of economic stress.
During the COVID-19 pandemic, borrowers encountered financial hardship. Data shows that banks were better equipped to help them.
Bowman pointed out that borrowers with bank-serviced loans were “more likely to receive forbearance than those with nonbank servicers.”
This indicates that a bank-centric model offers a safety net for homeowners. When the lender has a relationship with the borrower, they are more likely to work through difficulties.
Nonbanks often rely on short-term funding. This can make them less flexible when the economy takes a downturn. Bringing banks back into the fold could create a more stable housing finance system.
What this means for the future of banking
The push for regulatory relief comes at a critical time. Banks are looking for revenue sources in a challenging interest rate environment.
If the Fed adopts Bowman’s suggestions, we could see a resurgence of local lending. Community banks would once again compete aggressively for your mortgage business.
Increased competition usually benefits the consumer. It can lead to better customer service and potentially more competitive rates.
It also diversifies the risk in the financial system. Spreading mortgage assets across thousands of banks is generally safer than concentrating them in a few giant nonbank firms.
Bowman’s speech signals that the Federal Reserve is listening to industry concerns. They recognize that a “one-size-fits-all” approach to regulation has had unintended consequences.
The conversation has now moved from if rules should change to how they should change. Bankers across the country are watching closely. They are ready to step back into the housing market if the numbers make sense.
Restoring the balance in the mortgage market is essential for a healthy economy. It ensures that consumers have choices and that local banks remain vibrant pillars of their communities. As these discussions regarding capital rules continue, the hope is for a system that supports both financial safety and the American dream of homeownership.
